White House Predicts Bush Will Leave $482 Billion Deficit

By ROBERT PEAR and DAVID M. HERSZENHORN; Stephen Labaton contributed reporting.

Published: July 29, 2008

The White House predicted Monday that President Bush would leave a record $482 billion deficit to his successor, a sobering turnabout in the nation's fiscal condition from 2001, when Mr. Bush took office after three consecutive years of budget surpluses.

The worst may be yet to come. The deficit announced by Jim Nussle, the White House budget director, does not reflect the full cost of military operations in Iraq and Afghanistan, the potential $50 billion cost of another economic stimulus package, or the possibility of steeper losses in tax revenues if individual income or corporate profits decline.

The new deficit numbers also do not account for any drains on the national treasury that might result from further declines in the housing market.

The White House forecast was prepared before passage of the huge housing assistance package that Mr. Bush has promised to sign. That legislation would put taxpayer money at risk in numerous ways, especially if housing prices continue to decline.

Mr. Nussle predicted Monday that the deficit would more than double in the current 2008 fiscal year -- to $389 billion, from $162 billion in 2007 -- before shooting up to $482 billion in the 2009 fiscal year, which begins in about two months.

The deficit projected for 2009 would be the largest in absolute terms, easily surpassing the record of $413 billion in 2004. The White House and many economists prefer to measure the deficit as a share of the economy. The projected 2009 deficit would be 3.3 percent of the economy. That is the largest share since 2004, but well below the percentages recorded in the 1980s and early 1990s. In 1983, the deficit was 6 percent of the overall economy.

The bleak outlook for the budget will crimp the ability of the next president to carry out ambitious spending plans. And it adds to fiscal pressures that were already building because of the growth of Medicare and Social Security.

Senator John McCain of Arizona, the presumptive Republican presidential nomination, said the new report showed ''the dire fiscal condition of the federal government.''

''There is no more striking reminder of the need to reverse the profligate spending that has characterized this administration's fiscal policy,'' Mr. McCain said.

Jason Furman, the economic policy director for the campaign of Senator Barack Obama of Illinois, the presumptive Democratic nominee, said Mr. Obama would cut wasteful spending, close corporate tax loopholes and roll back tax cuts for the wealthiest Americans, ''while making health care affordable and putting a middle-class tax cut in the pocket of 95 percent of workers and their families.''

Mr. Furman said Mr. McCain was ''proposing to continue the same Bush economic policies that put our economy on this dangerous path.''

The new estimate of the 2009 deficit was $74 billion higher than Mr. Bush and Mr. Nussle had predicted in the president's budget just six months ago.

Mr. Nussle said the deterioration of the fiscal outlook resulted from ''a softening of the economy,'' and a reduction in anticipated revenue. He attacked Congressional Democrats, saying they had allowed spending to grow out of control.

Representative John M. Spratt Jr., Democrat of South Carolina and chairman of the House Budget Committee, said the new deficit figures confirmed ''the dismal legacy of the Bush administration.''

''Under its policies,'' Mr. Spratt said, ''the largest surpluses in history have been converted into the largest deficits in history.''

The recently passed housing bill authorizes the Treasury Department to spend virtually unlimited amounts to rescue the nation's two mortgage finance giants, Fannie Mae and Freddie Mac, should they be at risk of collapse. The Congressional Budget Office estimated the new rescue authority could add a total of $25 billion to the deficit in the next two years.

The budget office said there was a better than even chance the rescue authority would not be used, so there would be no cost. On the other hand, it said there was a 5 percent chance that one or both of the mortgage giants would need such assistance to cover as-yet-unrecognized losses greater than $100 billion.

Robert L. Bixby, executive director of the Concord Coalition, a nonpartisan budget watchdog group, said of the federal commitment: ''It may not cost anything. But if it costs a little bit, it may begin to cost a lot. You start to deal with market psychology here. It all adds up to a pretty scary picture.''

On Monday, the Bush administration announced a new program that could reduce some of taxpayers' huge exposure to Fannie Mae and Freddie Mac and, at the same time, reduce the dominance of the companies.

Treasury Secretary Henry M. Paulson Jr. said that four of the nation's largest banks had endorsed an administration effort to create a new market in a financial instrument that could be used to finance mortgages. The instrument, known as covered bonds, could provide a new source of cash for lending institutions.

When Mr. Bush took office, he predicted that federal debt held by the public -- the amount borrowed by the government to pay for past deficits -- would shrink to just 8 percent of the gross domestic product in 2009. He now estimates that it will amount to 40 percent.

Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget Committee, said, ''President Bush will be remembered as the most fiscally irresponsible president in our nation's history.''

Mr. Nussle bristled when asked about the Democrats' suggestion that Mr. Bush had transformed a surplus into deficit.

''There is much more to the book than the first page and the last page,'' Mr. Nussle said. ''There are many, many pages and chapters in between. Democrats seem to have not read all of them.''

Mr. Nussle asserted that Mr. Bush had inherited a recession and had to make up for years of inadequate spending on the military, intelligence and homeland security under President Bill Clinton.

The new White House report also includes these predictions:

Total federal revenues will decline slightly from 2007 to 2008.

In 2008 and in each of the next three years, corporate income tax collections will be lower than the amount collected in 2007.

Federal spending will increase nearly 8 percent this year and then 6.5 percent in 2009. In 2009, federal spending will be equivalent to 21.1 percent of the economy, the largest share since 1993.

The White House now predicts that the economy will grow 1.6 percent this year, after accounting for inflation, compared with its estimate of 2.7 percent in February. The estimate of growth for 2009 was also lowered, to 2.2 percent, from 3 percent.

Edward P. Lazear, chairman of the president's Council of Economic Advisers, pointed to oil prices as a culprit. ''Every time oil prices go up, it takes off some growth from our economy,'' Mr. Lazear said.

Spending on some domestic programs -- like veterans' medical care, unemployment benefits and food and nutrition assistance -- is growing faster than in the comparable period last year.

Another factor adding to the deficit is the distribution of tax rebates to individuals under the economic stimulus package signed into law by Mr. Bush in February. About $79 billion has been paid out through June.

CHART: While the federal budget deficit for the 2009 fiscal year is expected to reach nearly half a trillion dollars, as a share of G.D.P., it is still lower than many earlier deficits. Charts detail bar graphs for FEDERAL BUDGET DEFICIT OR SURPLUS; and AS A SHARE OF GROSS DOMESTIC PRODUCT. (Sources: Congressional Budget Office; White House Office of Management and Budget); Democrats John M. Spratt Jr., front, and Kent Conrad, have been critical of the Bush administration's budget policies.(PHOTOGRAPH BY STEPHEN CROWLEY/THE NEW YORK TIMES)(pg. C5)